Song Hongbing: U.S. Targets China in Launch of Currency War

Exactly what kind of war is behind the smoke of the currency war that has caught the attention of the world’s public? Is it exchange-rate games or trade protectionism? Is it the rebalancing of the world economy, or is it the globalization of U.S. domestic politics? In reality, discerning people all over the world can tell that the U.S. was the one who started this currency war, with the main tactic of the war being the so-called “quantitative monetary easing policy.” The war’s slogans are: “oppose currency manipulation”; “oppose trade protectionism”; and promote the “rebalancing of the world economy,” with the main target being China!

At its core, the currency war that the U.S. has initiated is an interest war directed by special financial interest groups. The trade deficit, the imbalance of the economic structure and other factors are nothing more than ways to heighten the atmosphere. The main beneficiary is still Wall Street.

The dollar is essentially a currency issued with debt as collateral. Behind the circulation of each dollar bill is debt someone owes the banking system. This dollar bill is in fact a receipt of a creditor’s rights, so every holder of an American dollar is a creditor of American debt. When the U.S. started its printing presses for its “quantitative monetary easing policy,” the Federal Reserve — through purchasing American debt and financial institutions’ holdings of notes and bonds — implemented a large-scale move to “monetize” a large portion of the U.S. debt. Thus, the huge volume increase of dollars greatly diluted the “gold content” of the original dollar holders’ creditors’ rights; at the same time, new issues of American dollar “toxic assets” surged. The “new American dollar” that emerged from the “quantitative easing” after the 2008 U.S. financial tsunami is an archetype of bad money and is the main reason that gold — an honest currency — rose sharply from $700 per ounce at the eruption of the 2008 financial crisis to today’s $1,350.

Since 2008, a large volume of “bad, poisonous American dollars” has streamed into China. China’s banking system settled foreign trade, direct investment and other dollar-distributing channels’ accounts with the Renminbi and then sold the dollars to the People’s Bank of China. At that time, the “bad, poisonous American dollars” overtly became an entry on the Renminbi’s balance sheet, ultimately held by the numerous people who hold Renminbi, which uses these receipts of creditor’s rights for poor quality American dollars as collateral for issuance. The virus of the U.S. currency has infected the Renminbi through the circulation of its currency. From the surface, the government holds U.S. currency reserves, but those who hold the Renminbi hold the receipts of these assets. Therefore, the real holders of the “bad, poisonous American dollars” are ordinary Chinese citizens, and the government is nothing more than a “proxy.”

Currently, the U.S. is starting to demand the appreciation of the Renminbi. If China has $2 trillion worth of foreign assets, and the Renminbi-to-dollar ratio is 8:1, then using these assets as collateral, it could issue 16 trillion Renminbi. Figuratively speaking, that would mean 16 trillion receipts of U.S. dollar assets. Through the multiplier effect of the banking system, these receipts have already flowed into the Chinese economic body and are held widely by the public. If the Renminbi is forced to appreciate to 6:1 under pressure from the U.S., and the same U.S. dollar assets correspondingly become 12 trillion receipts, what will happen then? Take the following metaphor: If $2 trillion (U.S.) can be exchanged for 16 trillion loaves of bread on the international market, then before the appreciation, each Renminbi can be exchanged for one loaf of bread. Now, the price suddenly changes to 12 trillion receipts in exchange for 16 trillion loaves of bread. It would appear that after appreciation, the purchasing power of the receipts increased, but in reality, when people use this price relationship to exchange for bread, they will suddenly find that while 12 trillion receipts bought 16 trillion loaves of bread, 4 trillion receipts couldn’t be exchanged for anything. The moment that the Renminbi appreciates, it will force 12 trillion new receipts to be worth the same as 16 trillion old receipts, implying that the purchasing power of reserve assets bought with old receipts tumbles. Worse, due to the excessive issuance of the dollar, the prices of goods worldwide will rise, which implies that the true purchasing power of pre-appreciation Renminbi will shrink substantially.

While popular attention is attracted toward topics such as trade balance and currency manipulation, the real play that is being staged is the reevaluation of China’s 30 years’ worth of reserve assets. Accompanying the real purchasing power of the Renminbi appreciating (in name) is the problem of the real purchasing power of a large part of its Renminbi reserve assets depreciating. This process clearly creates inflationary pressures within China, especially in the area of asset prices. Making matters worse is that the 16 trillion receipts are considered as the base currency. After the banking system expands this base and enters China’s banking system, with overall creditworthiness growing even larger … the inflationary effects are obvious.

The titular benefit of an increase in international purchasing power from a sharp appreciation of the Renminbi is many years in the future and can only be gradually realized if accompanied by imports and foreign investment. However, the losses in foreign exchange reserve assets and the damage of negative asset inflation caused by a reevaluation of a large portion of domestic reserve assets is immediate.

It comes as no surprise that Renminbi appreciation necessarily triggers the entrance of hot money on a larger scale, further intensifying inflationary pressure. The U.S. forcing the Renminbi to appreciate substantially will achieve a “two-birds-with-one-stone” effect. First is the substantial decrease in the real debt that the U.S. owes China; second is the provocation for Chinese asset prices to bubble. The faster the Renminbi appreciates, the more intense speculators of the Renminbi feel the urge to cash in on American assets. When the toxic debt that “bad, poisonous American dollars” shoulder has been more or less digested by countries all over the world, the Chinese asset bubble may develop to a state where there is no help. Then, the U.S. might suddenly substantially increase interest rates, raising the great flag of combating worldwide inflation, puncturing in one stroke China’s and other countries’ asset bubbles.

(The author is president of the Global Business & Finance Institute.)